Saturday 20 September 2008 19.01 EDT
First published on Saturday 20 September 2008 19.01 EDT

This article states that Sainsbury's bank is part of the HBOS banking licence and that if you hold money with Sainsbury's and Halifax, you will only be covered once up to £35,000 under the Financial Services Compensation Scheme. This is incorrect - Sainsbury's is licenced separately from all other HBOS brands, so any money that you do have with Sainsbury's will be covered up to £35,000 regardless of how much money you have in Halifax. We apologise for printing the wrong information.

There is no doubt now that the financial crisis, which started as distant concerns over investment banks in the US, will have a deep and lasting effect on the finances of the British public.

Every household will have been touched in some way. Difficulties in getting a mortgage, negative equity, tumbling share prices and redundancy have already reared their heads. Recall of overdrafts and other forms of credit - and soaring repossessions and bankruptcies - are likely to follow.

In this week's Cash section we address the immediate issues that may be worrying you and explain how to shore up your finances. Here we examine the main areas that have been affected, and over the page we answer readers' questions about the crisis. We aim to do the same next week.

Shares

'It is not the return on your money that you have to worry about, but the return of your money.' So says Mark Dampier, head of research at Hargreaves Lansdown. But his clients seem not to agree: HL has been inundated with people wanting to open dealing accounts, largely to buy shares in HBOS and the other bombed-out banks.

You should only join them if you are prepared to endure a 'white-knuckle ride', says Jeremy Batstone, head of research at Charles Stanley, and have a 'high risk tolerance'. 'If it is money you can ill afford to lose, you have to be careful,' he warns.

He expects volatility to continue until regulators have re-established control. 'The Fed [US Federal Reserve] is still just reacting to market pressure: that was what forced the [crises at] AIG, Lehman Brothers and Bear Stearns.' While each of these events sparked a rally in shares, they quickly started to fall again. Until there are 'clear signs' the Fed is getting on top of events, he says, speculators will continue to hunt for the next victim.

Gavin Oldham, chief executive of The Share Centre, expects the volatility to continue for much of the autumn. 'As we go towards the end of the year, the market will start to find its confidence and go forward again. For the moment, the market is only for the day. Shares could still go 15 or even 20 per cent lower.'

But Sam Morse, manager of Fidelity's Moneybuilder Growth Fund, urges investors not to panic-sell. 'This may be like shutting the stable door after the horses have bolted, and any attempt to time the market is fraught with risk. Growth in dividend payments is far more reliable than rises in share prices and even through the turmoil of the past decade, total returns from UK shares have held up - provided that you reinvested your dividends.'

Pensions

Tumbling stock markets have brought final-salary pension fund deficits into focus again: in the last week alone, these have swollen by around £20bn and have grown by £50bn over the last year. But those lucky enough to still be members of final-salary schemes need not worry about their retirement income: the companies operating them are committed to providing the promised level of pension. That means most schemes are now closed to new members, and many to existing ones too.

Those with private or money-purchase pensions will, once again, be receiving letters showing a fall in the value of their fund. Dampier says that if you have 15 to 20 years until retirement, you should not worry: 'You should actually be putting in more, if you can afford it, as the units you are buying will be much cheaper.'

The market's gyrations could be more worrying for those closer to retirement. Savers should start switching their investments away from risky shares to bonds and cash at least five years ahead of their target retirement date. Anyone who has not done this faces the choice of cashing in their pension at rock-bottom levels or deferring retirement.

Even the latter option is not pain-free. Apart from the uncertainty about when the stock market will stabilise, annuity rates fall further if, as expected, the Bank of England starts to cut base rates. That means the monthly pension your pot can buy will shrink.

Mortgages

When the credit crunch first hit a year ago, confidence vanished from the UK mortgage market, rates went up and the size of loans on offer shrank. However, in the past few weeks confidence had begun to return and rates had dropped by over 0.5 per cent on some loans. Now, however, the outlook for borrowers is less than rosy once again.

Libor rates, the lending rate between UK banks, shot up on the news of the collapse of Lehman Brothers. This means the liquidity squeeze has deepened again, and lenders could soon start withdrawing cheap deals and either not replace them, or substitute them for more expensive rates.

Ray Boulger of mortgage broker John Charcol agrees. 'I do think the rules of the game have changed since last weekend. On the basis that mortgage finance might get significantly worse, I think there is a strong argument for anyone looking to remortgage in the next six months to sort out a deal now.'

Boulger suggests that because interest rates are very likely to fall late this year and next year, a tracker mortgage, mirroring the Bank of England rate movements, still offers the best value. However, fixed-rate mortgages come with the benefit of certainty, so will still appeal to many borrowers.

Savers and savings

Memories of the Northern Rock collapse were haunting savers last week - but they are being urged not to panic.

Kevin Mountford, head of savings at Moneysupermarket.com, says: 'The worst thing that could happen is that customers panic and create a run on the banks. An institution like HBOS is a strong business and has strong deposits and it is not likely that it will disappear.'

In the unlikely event of a savings provider going bankrupt, savers are covered up to the first £35,000 (per saver, per institution) under the Financial Services Compensation Scheme (FSCS). If you have more than £35,000 in savings, you should consider spreading the money. You should check providers aren't part of the same banking licence (for instance, Halifax, Bank of Scotland, Sainsbury's Finance and Birmingham Midshires are all part of HBOS), as the FSCS will only cover your savings to a total of £35,000 across all parts of one organisation.

On the up side, the savings market is strong. Michelle Slade, analyst at Moneyfacts.co.uk, says: 'Savers are likely to find themselves in the best position, as last time [a bank collapsed] banks struggled to raise funds on the money markets and turned to their savings books to fund mortgages. Savers were tempted by rates over 0.5 per cent higher than we would normally expect to see when the base rate is at 5 per cent. Rates are still higher than usual and could go even higher.'

Mountford says it is likely savers will see more soaring rates on fixed-rate bonds in particular, many of which are already paying over 7 per cent. 'There are some great rates around as institutions are desperate for deposits. It's still safer to have your money in a savings account than in a biscuit tin, after all.'

But with inflation up to 4.7 per cent, basic rate taxpayers need to be earning at least 5.9 per cent on any taxable savings to beat tax and inflation. Higher rate taxpayers would need to be getting 7.9 per cent. According to Mountford, the leading savings accounts are Alliance & Leicester's easy-access eSaver, which pays 6.56 per cent; ICICI's HiSave one-year bond at 7.2 per cent; and Leeds building society's 'inflation buster bond' which is paying 7.25 per cent interest.

· Next week we will be answering questions about the credit crisis and what you can do to stave off its impact. Email your concerns to cash@observer.co.uk, putting 'credit crisis question' in the subject box.